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Banking reforms hobble economic
growth
By Marwaan Macan-Markar
BANGKOK - A cartoon in Thursday's Bangkok Post
newspaper - showing a banker crushed by two weighty bags
of Thai currency - reflects a growing view that Asia's
financial policies have unwittingly become a burden to
the region.
This is because five years after
East Asia's financial meltdown, one of the International
Monetary Fund's (IMF) key prescriptions for nursing
financial systems back to health is proving to be
counterproductive for their economies, says a Japanese
banking expert. Sayuri Shirai, an associate professor at
Japan's Keio University, says this trend is most
noticeable in Southeast Asian countries such as Thailand
and Indonesia, which were badly affected by the
financial crisis of 1997.
Early on in the
crisis, Asian economies agreed to embrace the IMF's
financial reforms, which included cleaning banking
systems of non-performing loans (NPLs) that were
transferred to asset management companies (AMCs) created
to dispose of these loans.
Banking reform has
earned the countries good marks in recovery after 1997,
but it has had another side-effect. Burned by massive
corporate failures that left them with bad loans, Asia's
banks have been reluctant to lend money - at a time when
credit is needed to keep economic activity going. In
short, companies are having a hard time getting credit
from banks. This discourages investments that could
create more jobs and stimulate economic recovery -
beyond nice-looking balance sheets.
"The banks
are playing it safe and [instead] going for government
bonds," Shirai said on the sidelines of a Wednesday
seminar here on the Asian banking sector. "They're
nervous about lending to companies. And it now appears
to be a mistake," she added, pointing to "the IMF's
insistence on clean balance sheets" as a reason for this
trend.
Figures from Thailand, Indonesia and the
Philippines reflect the pattern of tight bank credit for
the private sector. In Thailand, bank credit to the
private sector was 101.7 percent of gross domestic
product (GDP) in 1996 and 121 percent of GDP in 1997,
but slipped in 2001 to 74 percent of GDP. In Indonesia,
it was 55.4 percent of GDP in 1996, 60.8 percent the
next year and down to 20 percent of GDP by 2001. In the
Philippines, bank credit to the private sector was 49
percent of GDP in 1996, 56.5 percent the following year,
and 35.5 percent last year.
The banks' aversion
to credit risks has given rise to excess liquidity.
"With no demand for new investment and a lack of
confidence in the direction of the country's economic
recovery, the banks ended up hoarding money," said
Thursday's editorial in the Bangkok-based
English-language newspaper The Nation. "Excess liquidity
in the banking system has thus ballooned to 1 trillion
baht" (US$23 billion).
"There has been no loan
growth in Thailand since the 1997 crash till 2001,"
added Therapong Varapong, a bank analyst at the Bangkok
division of the global financial management advisory
firm Merrill Lynch. "Loan growth has contracted after
1997."
This trend exists in other East Asian
countries too, but Therapong adds that "it is ridiculous
to blame the banks" for their caution. "Look at the
borrowers. Are they credit-worthy?" he asked.
"Loans of Asian banks have become much more
conservative than before the crisis, and have shifted
towards much low-risk consumer banking from corporate
lending which is vital for a nation's development,"
states a background note at the banking seminar here,
organized by the United Nations Economic and Social
Commission for Asia and the Pacific (ESCAP).
Raj
Kumar, author of the note and head of the development
research and policy analysis division at ESCAP, adds
that the level of credit to corporate borrowers is now
far below pre-1997 levels as "banks appear to have
become risk-averse".
A report by ESCAP and the
Asian Development Bank (ADB), released on Wednesday,
confirms that Asia's banks are opting to "reallocate
their portfolios towards a larger purchase of
securities". This will lead to a lack of new jobs due to
retarded economic activity, Kumar adds.
In
Thailand and South Korea, banks are staying away from
companies and seeking business instead from consumer or
retail credit - encouraging people to take and use
credit cards and going on a buying boom. But Shirai says
banks must lend wisely without becoming overly tight in
credit, because loan growth is a sign of economic
health. "Banks have to take the risk and lend to
companies to support economic growth," she added. The
ESCAP-ADB report also says Asian companies will not
necessarily find the capital they need from the region's
weak and mostly small equity markets.
As of
June, 48.6 percent of Indonesia's bank loans were
non-performing, a legacy of the 1997 crisis that saw the
massive withdrawal of capital that left the financial
sector with unpaid loans and caused economic and social
upheaval. Thailand's NPL percentage was 19.3, Malaysia's
10.3 percent and South Korea's 8.5 percent, according to
the report.
These figures support the common
analysis that South Korea is the best performer in
financial reforms, not least because its asset
management corporation has sold more than half of the
NPLs it purchased. But the consumer boom in South Korea,
helped in no small part by banks turning to retail
credit, is starting to worry experts who say it may lead
to problems that the rest of East Asia - including
nations such as Thailand that are pinning their hopes on
consumer demand - should watch out for. Household-debt
levels in South Korea have risen from less than 50
percent of annual GDP before the 1997 crisis to 70
percent by the second quarter of this year. Some banks
have about half of their loans out to the retail sector.
Critics such as Shalmali Guttal, with the
Bangkok-based think-tank Focus on the Global South, are
not surprised that the IMF's policies for Asia are being
taken to task for the second time. In 1998, the IMF came
under fire for policies that made it hard for crisis-hit
governments to help its most needy people. "This
[criticism] is expected, because its policies are
fundamentally flawed," said Guttal. IMF policies are
based on "an imagined free market, but there is no ideal
free market. It does not exist."
But others say
banks should indeed learn from their imprudent credit
behavior in the past. Winston Milton, managing director
of the Thai office of the ratings agency Fitch Ratings,
said: "This [caution in lending] won't change until the
bad loans are written off books, and it should last for
three to four years."
(Inter Press
Service)
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